Isthmus Community Powered Sharing: Conscious Company Decisions

Jen van der MeerCapitals

Welcome to the Alternative Capital Explorers Series, the story of Isthmus.

As I’ve been exploring in the Capital Library, most early stage financing alternatives to the standard Angel and VC offerings of equity require a track record of revenue in order to qualify for funding. But what if you are an early stage company and you need to develop technology and community before you’ve finalized the business and pricing model? Learn from Isthmus, a community-powered fashion company.

 

Company Type

Capital Type

Business Model

C-Corporation

Angels, Seed VC Convertible Notes     Roll-Up Vehicle to Accept Small Checks

Runway to Explore a Community-Focused Marketplace Model

Background

The Rise of Second-Hand as Big Business 

The secondhand clothing market has become a big business, currently worth more than $400 billion, and is expected to jump to $80 billion, growing 21x faster than conventional apparel, as projected by ThreadUp.

But the behavior incentivized by marketplaces like Depop, Poshmark, and TheRealReal did not necessarily lead to a more sustainable industry. As younger generations sought new ways to view their consumption as an expression of individual identity, they have flocked to secondhand sites to create unique looks. This trend has led to fashion flipping, which encouraged the buying of secondhand clothes just for resale.

Even the concept of buying the latest fashion and then getting an ethical or sustainable benefit by donating to Goodwill accelerated growth at the front-end of the supply chain. The fashion industry has increased its contribution to climate change, now producing 10% of carbon emissions, while also ranking as the second-largest consumer of the world’s water supply.

Sustainable Swapping

Carley Lake is the founder of Isthmus. Her curiosity about sustainable fashion first manifested as a website, Thoughtful Flamingo.com, to “help readers discover their true style as they quit fast fashion, but focused more on re-wearing and repairing clothes.”

At the time, she deeply understood large-scale fast growth marketplaces from her role as the Global Marketing Director for Safety at Uber, and who also co-launched UberEats. Carley knows marketplaces and how to launch additional participants to marketplaces. She also knows how marketplace design and incentive structures can change the fabric of existing businesses and society.

As she observed the sustainable and thrifting trends take shape, she noticed a promising behavior: the emergence of the online clothing swap organizer curating groups for swapping clothes. Much like the offline behavior of the stoop clothing swaps you might see in Brooklyn, SF, or Amsterdam, the organizer has a certain aesthetic, an eye for a type of design, but also a set of values around sharing, repairing, and caring for each other, and for clothes.

These swap organizers are typically working as volunteers or doing this as a hobby. Carley validated with community leaders and their communities including Patagonia Buy/Sell/Trade Facebook Group, the largest slow fashion resale Instagram community @selltradeslowfashion, and more. The social networks provided the go-to toolset for these organizers but they were not ideal for cultivating community relationships. 

Carley’s questions: How might this type of online behavior be encouraged, especially to support designers who create high-quality pieces that deserve to be cherished by a whole group of people. How might she start a company that celebrates the clothing swap organizer, built around effective community engagement, but without designing a marketplace system that would result in unsustainable behavior?

Time to Jump

Carley quit her job in Uber in March of 2020 while living in Amsterdam, just before the pandemic went haywire. She started working on a low-code MVP using Bubble to build out the core features and the concept of Isthmus started to become reality. She started to explore business model questions, company structure, and capital ideas as she thought through how she should build and fund the business.

The map below shows the three primary decision paths Carley needed to explore to get her company off of the ground:

Business Model Questions: Community-Powered Sharing

Carley knows the marketplace business model where the company takes a transaction cut of any transaction on the marketplace. Yet when accelerated through aggressive growth, this type of model may risk distorting the very community she is trying to support. Incentives to increase the volume of sales, the primary goal of a marketplace cut model, may lead to shifts in behavior that could alter or diminish the intrinsic human behavior of swap organizers and community members.

At the same time, it was too early to charge a fee for the swap organizers or a membership fee for the swap community. These online swaps were fairly new, and introducing monetization so soon in the development of these markets might lead to a very small commercial outcome.

What Carley needed was time to figure out a marketplace community model and runway to test different incentives and hypotheses. This stance actually helped to clarify other paths that Carley was pursuing.

Capital Questions: the Cold Start Problem

Initially, Carley struggled with the “chicken or egg” cold start problem common to two-sided marketplaces. Swappers will join marketplaces that have enough organizers, and organizers need swappers. If the people on a network produce the majority of value for other users, how do you create enough value in an MVP to get the first users to join?

Before exploring financial capital, Carley invested her own “sweat equity” to create her MVP using Bubble, a no-code prototyping tool.  This was enough to get the ball rolling and demonstrate that she had a vision and even attract potential co-founders. 

As Carley enrolled her co-founder and CTO, the limits of this approach became clear.  Tanya Dastyar came to Isthmus from a prior startup and has a background in computer science with expertise in research, data analysis, and tech product management across UX, design, and engineering. The pair recognized that in order to scale a marketplace, they would need capital, a full-stack engineer, and a social community manager in order to truly turn on the company.

The team was curious about equity crowdfunding and revenue-based finance but those capital types both required a more stable revenue track record to be successful. They knew that Isthmus could not be scaled only through customer cash flow alone.

Carley did not want to lock into the assumption of hyper-growth VC, but at the same time, she wanted time to experiment with her business model. This left Carley with the option of raising capital from angel and pre-seed VC investors who were aligned to the values and growth timeline for the company.

Company Structure: Consciously Chosen C-Corp

Carley and Tanya’s business model and capital decisions resulted in a Delaware C-Corp as her ideal company structure. While many choose this structure because it is easy, inexpensive, and fast, this team made the decision carefully and consciously after exploring other options.  

During the summer of 2020 MVP build, Carley learned about different company structures. She took a summer course in Platform Cooperatives, a movement that hopes to promote worker and customer-owned cooperative structures as an alternative to the Ubers and Amazons of the world. But without a clearly validated business model it would be near impossible to structure the right ownership agreement, and even harder to raise funding.

The concepts of the Zebra’s Unite community resonated with Carley, with a focus on building businesses that repair, cultivate, and connect rather than aiming for disruption. But many of these companies were exploring sectors with easier, clearer paths to revenue and profit. How would she get the time to explore possibilities and figure out the business model?

The pair joined the OnDeck Fellowship focused on Community, and soon after rested on their core choices of business model, company structure, and capital type. Carley and Tanya chose to incorporate as a C-Corporation in Delaware, for ease of incorporation and also because this structure is preferred when raising money from Angel and VC investors.

When seeking out angels they targeted investors who were more likely to be interested in the concept of sustainable fashion and were honest about their hypotheses and ideas for the business model. Their pre-seed fundraising round would be focused on exploring and testing the product and business model to determine the best path to growth.

Focus, Network, and Fundraising

Carley and Tanya managed a well-orchestrated two-month proactive fundraising process, reaching out to over 150 angel and VC investors in the US and Europe, with 25 committing to invest.

They received $700,000 in funding from pre-seed VC Precursor Ventures and angel investors like Allison Barr Allen (COO of Fast), Ryan Caldbeck (Chairman/Founder of CircleUp), Kate Parker (COO of Transcend), Russ Heddleston (CEO of DocSend), and more. 

The co-founders also wanted to include the ability for friends, former colleagues, and early supporters in the raise so they set up a Roll-Up Vehicle with Angelist for an additional $50,000 in smaller check investments. Roll Up Vehicles are a type of Special Purpose Vehicle designed for founders that want to efficiently raise capital from individual operators and angels with a single cap table entry. They found out about this option halfway through their raise and would recommend any early pre-seed companies to consider as a way to enroll the community of backers at the start. 

Our Alternative Capital Explorers case studies continues with an exploration of a founder who made conscious decisions about capital types to give the runway to explore new models.  

 

New and rediscovered types of capital are creating different social arrangements between organizations, their backers, and beneficiaries. An explosion of varying capital, organizational structures, and fundraising mechanisms are opening up possibilities and doors for entrepreneurs and leaders. I’ll be tracking how founders like Carley Lake combine and recombine capital types, business models, and community strategies to build and share wealth. Reach out if you believe your company would make a great case study, or if you have a suggestion for a company we should cover. 

Disclosure: This article represents the opinion of the writer, Jen van der Meer, who does not own a stake in Isthmus. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Make sure you consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.